Heckmann (HEK) seems to be well positioned to benefit from the increase in drilling and fracking within the oil and natural gas industry. It will also benefit from increased environmental regulation likely to come from the EPA regarding the recycling and disposal of fracking fluids.
Heckmann Corporation delivers, collects, and provides treatment and recycling of liquid and solid products used in oil and gas drilling. They also provide waste recycling for used motor oil, spent antifreeze, used oil filters, and more.
Thesis & Catalyst For Heckmann Corporation
The buzz in the energy sector continues to be the huge shift in U.S. oil supplies. The U.S. could become the world’s largest oil producing country within the next 7 years according to the International Energy Agency (IEA). The U.S. may become what the Middle East is today thanks to what is known in the industry as fracking. With jobs in short supply and the economy growing much too slow, it is unlikely that the government will ban fracking and disrupt the huge job growth forecast in the energy sector.
Drilling and fracking for natural gas and oil is ecologically damaging. It also requires a lot of water. Shas Dey writes, "For every one of the approximately 11,400 new shale wells drilled per year in the US, nearly 6.1 million gallons of water is required. That comes out to 70 billion gallons of water needed per year." (Source: http://beta.fool.com/edliston/2013/04/18/heckmann-to-benefit-from-industry-growth-and-acqui/31742/) Drilling and fracking also produces toxic water and damages soil layers. It is likely that measured environmental regulation will be coming from the EPA regarding fracking. Not to worry, Heckmann has the solution.
Heckmann will not only help deliver water to the fracking site, it will ship away the toxic water for recycling at one of its plants. Heckmann offers a solution for the entire process and gets paid not only for bringing in fresh water but also for hauling out the toxic waste water.
Any increased environmental regulation that is likely to come from the EPA will benefit companies like Heckmann .
Acquisitions In 2012 Lead To Huge Sales Growth In 2013 and Beyond
In 2012, Heckmann purchased Thermo Fluids and Power Fuels. Both these purchases allow Heckmann to expand and improve on their environmental services to the oil and natural gas industry.
Thermo Fluids is an environmental services company that focuses on recycling used motor oil. Heckmann bought it for $425 million in cash.
Power Fuels is an environmental services company that transports, treats, recycles, and disposes of fluids used in drilling and fracking. Heckmann purchased it for $125 million in cash and 95 million shares of its common stock.
Heckmann will change its name to Nuverra and will begin trading under the ticker symbol NES on May 13, 2013.
Heckmann has a whopping 30% of the float short as of April 15, 2013. The heavy short selling of HEK since September of 2012 has pushed the stock down from $5 to just $3.70 as of May 3, 2013.
This has created an oversold opportunity in the stock. The forward P/E is 20 and the stock trades at a P/B of just 1.10 or just $0.34 above book value.
The sales growth for Heckmann has been incredible. The EPS in 2012 grew 2022.34% year over year. In 2011, revenue was $156 million for the year. In 2012, revenue was $351 million! That’s a revenue growth of nearly 125% year over year! Heckmann expects revenue to double again in 2013 with a target between $750 million and $825 million!
Heckmann seems to be well positioned to benefit from the increase in drilling and fracking within the oil and natural gas industry. They also will benefit from increased environmental regulation likely to come from the EPA regarding the recycling and disposal of fracking fluids.
Heckmann is reporting earnings on May 8th 2013 and if they meet expectations or beat, we could see a short squeeze in the stock which could carry it up to the $4.50 area.
As the result of its acquisitions, Heckmann has positioned itself nicely in years to come; however, this market positioning has not come without a hefty price.
Heckmann has total cash of just $16.21 million with total debt of $566 million. There is no guarantee that Heckmann will be able to service this huge debt.
Heckmann increased its outstanding shares from 124.85 million in 2011 to 251.80 million in 2012. A whopping 95 million shares in 2012 were used to finance the purchase of Power Fuels. Investors hate share dilution and short sellers moved in as a result. With 30% of the float short, there is no guarantee that short sellers will start to cover their positions anytime soon.
Although it seems unlikely that the U.S. government will move to ban fracking, it still is a possibility. There are many protests in towns and cities across the country regarding the controversial process of fracking. Should the government ban fracking, Heckmann would likely have to file for bankruptcy.